Stock repurchases and future operating performance: empirical evidence from Italy

In this work we analyze the operating performance of industrial companies listed on the Italian Exchange that announced a share buyback from 1989 to 2001. In detail we aim at verifying if the buyback announcement releases optimistic information about future profitability (‘Signalling Hypothesis’) or conveys a commitment that companies will pay back cash to investors in case of poor operating performance, in order to avoid agency costs (‘Free Cash Flow Hypothesis’). We find that the sample companies exhibit a significant worsening of the operating performance subsequent to the announcement, both in absolute terms and benchmarking with a control sample of matching companies. The poor operating performance is particularly significant for companies that effectively buy back the shares after the announcement, while no significant difference is detected for firms that announce the buyback but do not repurchase shares effectively. The results validate the ‘Free Cash Flow Hypothesis’.